Establishing Precedence Clauses in Cross-Border Earn out Agreements
Explicit precedence clauses in cross-border earn-out agreements prevent accounting schedules from overriding core legal risk allocations and governing law provisions.
Buyer Operational Covenant
Meaning
Contractual obligations in acquisition agreements restrict the conduct of the purchasing party during the interim period between signing and completion. A buyer operational covenant ensures that the purchaser does not take actions that could impair its ability to close the transaction or damage the target company’s value before ownership transfers. These promises usually require the buyer to maintain its financing arrangements, secure necessary regulatory approvals, and refrain from material alterations to its corporate structure.
The commitment terminates upon the successful transfer of shares or the lawful termination of the purchase agreement.
Interim Restriction
Operational constraints prevent the purchaser from engaging in activities that could jeopardize the transaction or the financial health of the combined entity. When a buyer operational covenant is active, the purchaser must manage its business in the ordinary course to avoid rating downgrades or debt breaches. It restricts the buyer from making large acquisitions or incurring material unapproved debt before the closing date.
This protective measure keeps the buyer’s balance sheet stable during the transition. The restriction also prevents the buyer from initiating major layoffs or changing its core accounting policies, which could disrupt the post-merger integration process or alter the baseline valuation agreed upon by both parties.
Compliance Enforcement
Breach of these obligations allows the seller to seek specific performance or terminate the transaction before completion occurs. If the purchaser fails to comply with a buyer operational covenant, the seller can withhold its own performance or claim damages for expenses incurred. Legal action remains the primary method to compel compliance with these terms.
Contractual provisions often specify that injunctive relief is available to prevent immediate harm.
Risk Allocation
Placing these duties on the purchaser shields the seller from the financial fallout of a failed transaction. The allocation of risk ensures that the buyer carries the burden of keeping its financing and regulatory approvals intact. This liability encourages the purchaser to act diligently to satisfy all closing conditions.
Acquisition stability is the ultimate effect of a secure path to completion.